Legislative Analyst's Office

Analysis of the 2001-02 Budget Bill

Department of Child Support Services (5175)

The Department of Child Support Services (DCSS), created on January 1, 2000, administers California's child support program by overseeing 58 county child
support offices. The primary purpose of the program is to collect from absent parents, support payments for custodial parents and their children. Local child
support offices provide services such as locating absent parents; establishing paternity; obtaining, enforcing, and modifying child support orders; and collecting
and distributing payments. The 2001-02 Governor's Budget proposes expenditures totaling $1.1 billion from all funds for support of DCSS in the budget year.
This is an increase of $157 million, or 17 percent, over estimated current-year expenditures. The budget proposes $487 million from the General Fund for
2001-02, which is an increase of $79 million, or 21 percent, compared to 2000-01. Most of this increase is attributable to a higher federal automation penalty
and lower federal incentive payments.

Total Automation Penalties Could Reach $1 Billion

Since 1998, California has been subject to penalties for failing to implement a statewide child support automation system. The penalties, estimated to be
$114 million in 2000-01 and $163 million in 2001-02, are levied in the form of a reduced federal share of child support administrative expenditures. The
penalties are expected to continue through 2004-05, potentially reaching a total of $1 billion since 1998.

The federal government usually pays two-thirds of a state's total child support administrative expenditures. However, pursuant to the Child Support
Performance and Incentive Act of 1998 (Public Law 105-200), California has been subject to federal automation penalties which are levied in the form of a
reduced federal share in these administrative costs. Chapter 479, Statutes of 1999 (AB 150, Aroner) provides that the distribution of penalties between the state
and counties be determined through the annual budget process. Chapter 479 also provides that the state General Fund could be used to backfill for the loss of
federal support, or the state also could distribute some share of the penalties to the counties.

Total Penalties Could Reach $1 Billion. From 1997-98 through 1999-00, California's child support program incurred penalties totaling $104 million and the
state General Fund backfilled the loss of these federal funds. The penalty is set by federal law at 25 percent and 30 percent of estimated federal expenditures for
child support administration for federal fiscal years (FFY) 2000 and 2001, respectively. California faces a $114 million penalty in 2000-01 and an estimated
$163 million penalty in 2001-02. Thus, California will have incurred penalties of about $380 million through 2001-02.

We note that with even modest increases in administrative expenditures, child support penalties could approach or exceed $200 million for each of the years
during the three-year period of 2002-03 through 2004-05. When added to the penalties incurred through 2001-02, this means that California could incur
penalties totaling almost $1 billion over this time period. The statewide automation system is scheduled to meet federal requirements in 2005, at which time the
penalties would be discontinued.

Counterproductive Nature of the Penalties. In previous analyses, we have shown that the principal goal of the child support programthe collection of
supportis strongly related to the amount of fiscal resources committed to the program (that is, administrative expenditures). (For further detail, see our April
1999 report entitled The Child Support Enforcement Program From a Fiscal Perspective: How Can Performance Be Improved?) We concluded that
administrative effort has a particularly strong relationship to collectionsexplaining about 70 percent of the variation in collections between counties. In other
words, counties that did poorly in making child support collections generally had invested less in administrative effort. Conversely, counties that did well in
child support collections had made higher administrative expenditures.

We note that until the statewide child support automation system is fully implemented increased administrative spending in the child support program will
result in increased penalties. This is because the federal penalty is based on administrative expenditures. Thus, any net direct fiscal benefit (that is, increase in
collections) to government from increased administrative spending is reduced significantly. We note that the collection of child support is essential for families.

Child Support Automation Penalties Overbudgeted

We recommend that proposed spending for child support administration be reduced by $7.9 million from the General Fund because historic spending
trends indicate the federal penalty will be less than budgeted. (Reduce Item 5175-101-0001 by $7,900,000.)

As noted previously, future federal child support automation penalties will be levied as a 30 percent reduction in federal funds to support administrative costs of
the child support program. The Governor's budget estimates a 2001-02 penalty of $163 million from the General Fund. This estimate assumes a 21 percent
increase in total administrative spending in the FFY 2001 (October 2000 through September 2001), based on the actual increase in spending between 1998-99
and 1999-00. We believe this estimate is inflated because it has not been adjusted downward to reflect a number of one-time expenses in 1999-00. In addition,
our examination of historic trends in the "core" administrative functions of the program found that expenditures increased at a lower rate of approximately
14 percent. A federal penalty based on this slower rate of growth would be $155 million, resulting in a General Fund savings of approximately $7.9 million.
Accordingly, we recommend that the budget be reduced to reflect the lower cost for the federal penalty.

Child Support Automation Proposal Lacks Detail

The budget proposes $16.5 million ($5.6 million General Fund) for interim child support automation improvements over the next three fiscal years,
2001-02 through 2003-04. Without prejudice to the merits of the proposal, we recommend that the Legislature (1) delete this multiyear funding request and
(2) instruct the department to include a specific interim automation proposal for 2001-02 only in the May Revision to the Governor's budget that is
consistent with federal guidelines. (Reduce Item 5175-101-0001 by $5,600,000.)

The Governor's budget for 2001-02 proposes a total of $18.1 million for support of an interim child support automation system. This amount consists of
$16.5 million for local assistance and $1.6 million for state operations. We discuss the local assistance proposal in this write-up and the state-operations
proposal in the following write-up.

Background. Pursuant to federal law, the Statewide Automated Child Support System (SACSS) was intended to provide automated child support enforcement
tracking and monitoring capability through local child support offices. Following several years of difficulty, the state terminated the SACSS project in late
1997. The cancellation of SACSS resulted in the need for California to implement interim automation systems until a new statewide system is functional. The
new statewide systemknown as the California Child Support Automaton System (CCSAS)is scheduled to be fully implemented in 2005.

Interim Automation Systems. Pursuant to Chapter 479, counties may be required to modify their current child support automation systems or to change to a
different system in preparation for the new statewide automation system. The Governor's budget proposes $16.5 million ($5.6 million General Fund) to be
expended over three years for the costs of converting counties from various automation systems to one of the six interim systems approved by the federal
government. Although interim system improvements may be necessary, we believe that the proposal does not provide the Legislature with sufficient detail
regarding budget-year and out-year costs. Therefore, we recommend the deletion of the $16.5 million ($5.7 million General Fund) and the related budget bill
provision. We further recommend that DCSS submit at the time of the May Revision a proposal that reflects only estimated budget-year funding requirements.
The revised budget-year proposal should demonstrate consistency with the most recent federal guidance on interim automation efforts.

Pre-Statewide Interim Systems Management (PRISM)

We recommend that the Legislature approve $1.6 million for the continued support and operation of the Pre-Statewide Interim Systems Management
(PRISM) project. We further recommend adoption of budget bill language requiring the Department of Child Support Services to obtain federal approval
prior to implementation of PRISM modifications.

Background. Chapter 479 required DCSS to assume a more active role in overseeing the maintenance and operation of the interim automation systems of the
child support program until the new statewide CCSAS is operational. Prior to the interim systems, counties had been responsible for maintaining, enhancing,
and supporting their existing systems with minimal state oversight and involvement. In response to this new requirement, the state combined all of the
individual systems into one project known as the PRISM project.

The PRISM project, which will spend almost $1 billion in state and federal funds over a six-year period, currently supports six county-based child support
enforcement systems, performs data conversions to one of these six systems, and operates and maintains the state's interim federal case registry. The state will
operate PRISM until 2006 when it will be discontinued and replaced with the CCSAS system.

Chapter 479 also required DCSS to ensure that the automation activities of these interim systems are consistent with the new statewide system, and if necessary,
seek federal funding and approvals for those activities. Counties were prohibited from changing or enhancing those interim systems without prior approval by
DCSS.

The DCSS Requested Federal Funds for PRISM Support. In April and August 2000, DCSS submitted requests to the federal Administration of Children and
Families (ACF) for additional federal funding to maintain PRISM systems. Specifically, DCSS requested funds to:

Operate and enhance the six systems to comply with various mandates.

Convert all counties to one of the six systems.

Operate the state's interim case registry system which transmits California child support orders to the Federal Case Registry.

The ACF Denies or Defers Decision on Funds for Systems Enhancements. In July 2000, ACF either denied federal funds or deferred its decisions (pending
receipt of additional cost information) relating to a number of the enhancement requests. In response, DCSS reorganized its priorities, redirected funds to
continue some enhancements, and asked ACF (in August 2000) to reconsider its decision to defer funding on the remaining requests.

In October 2000, the Department of Finance (DOF) notified the Legislature that ACF had denied a portion of DCSS' request, but that DCSS intended to redirect
existing resources to fund activities in the current year. The DOF letter, however, indicated that it might request additional funds for the budget year.

Federal Government Denies Funding, but DCSS Allows County Enhancements to Proceed. Because of the urgency of the time lines and momentum of the
projects involved, DCSS subsequently allowed counties to spend $3.1 million in the current year for various deferred system enhancements. In November 2000,
ACF ultimately notified DCSS of its denial of $8.9 million in federal funds requested for various adjustments to PRISM in the current year, of which
$4.1 million was for the deferred enhancements.

Budget Request. The budget reflects an ongoing General Fund increase of $3.8 million in the current year and proposes an additional ongoing augmentation of
$1.6 million in the budget year.

Concerns. The sequence of events which occurred with PRISM are similar to those that have occurred with other child support automation activities (see our
analysis of the Franchise Tax Board's California Arrearage Management Project [CAMP] under Item 1730 of the "General Government" section of this
Analysis). In each of these situations, the administration initially sought legislative approval for short-term or interim automation systems pending development
of a statewide system. Concurrent with seeking legislative approval, the administration also sought federal funding approval. Generally, federal funding
decisions are made months after enactment of the budget act. In the case of both CAMP and PRISM, the federal government took a more restrictive view of the
short-term system and decided to limit its funds only to those activities which directly enhanced the single statewide system. This left the state in a difficult
positioneither proceed without federal funds or stop the short-term projects.

The problem in the case of PRISM is that the state assumed federal approval and decided to proceed by redirecting support from the General Fund. When
federal funds were denied, the department had a shortfall of $3.8 million.

Recommendation. The increases reflected in the Governor's budget for PRISM in the current year ($3.8 million) and proposed for the budget year
($1.6 million) are consistent with the state's prior commitment to the federal government and we, therefore, recommend budget-year approval. In order to avoid
future situations, however, which create deficiencies in the department's budget, we recommend that the Legislature adopt the following budget bill language:

It is the intent of the Legislature that the Department of Child Support Services shall receive federal funding approvals prior to any changes in scope or funding
of the Pre-Statewide Interim Systems Management Project.

Permanent Positions Are Needed to
Support Child Support Automation Activities

We recommend that the Legislature reject the budget proposal to provide ongoing oversight of county-based automation activities through the use of
consultants and instead authorize 3 personnel years to provide such oversight. (Reduce Item 5175-001-0001 by $11,000 and add three positions.)

The budget proposes an augmentation of $224,000 for departmental consulting services to oversee counties' ongoing child support automation activities. For the
past three years, three limited-term positions within the department have provided these activities.

The DCSS Required to Provide Ongoing Oversight of County Child Support Automation. Chapter 479 requires each county to enter into an Annual
Automation Cooperation Agreement (AACA) with DCSS by December 1 of each year or risk losing its funds. Chapter 479 further allows a county to modify its
AACA to reflect subsequent changes in law and requires DCSS to issue guidelines and review all AACAs and AACA modifications.

The DCSS Oversight Activities Are Expected to Continue. We anticipate that DCSS' planning and oversight of county AACAs and county-based automation
efforts will need to continue not only during the period of the PRISM project but after implementation of the statewide system as well. The DCSS, for example,
will need to review any design enhancements to internal county systems to ensure compliance with the county's AACA.

The DCSS Should Not Acquire Consulting Services for Ongoing Activities. We recommend the establishment of permanent positions to undertake the
proposed planning and oversight activities. This is because these activities to be performed are ongoing in nature and are less expensive when performed by
state staff. Therefore, we recommend that the Legislature reduce the proposal by $11,000 and authorize 3 personnel years for ongoing departmental oversight of
county automation activities. This would leave $198,000 for personnel services and $15,000 for operating expenses and equipment to support the three
positions.